Awareness key to implementing Scottish rate of tax
Members of the ICAS Edinburgh Tax Network are briefed on the new Scottish Rate of Income Tax by key HMRC officials.
ICAS members and HM Revenue & Customs' (HMRC) experts have been discussing key issues around the introduction of the Scottish Rate of Income Tax (SRIT).
The ICAS Edinburgh Tax Network and HMRC held a joint discussion event at CA House in Edinburgh on 16 September, chaired by ICAS Director of Taxation Charlotte Barbour, with speakers from the HMRC team working on SRIT.
Powers to set a Scottish rate of income tax were included in the Scotland Act 2012. Depending on the level at which the Scottish Parliament sets the rate, Scottish taxpayers may pay a different rate of income tax to taxpayers elsewhere in the UK.
SRIT applies to earned income only, not income from savings or dividends, and it applies only to individuals, not partnerships or trusts even if they pay UK income tax.
The SRIT takes effect as from 6 April next year and the Scottish Parliament must set a rate for it ahead of that date.
At the discussion group, Neil Rollason, strategic lead for employer duties, HMRC Large Business, said: "SRIT is not just an issue for 'Scottish' businesses. We estimate that at least 70 per cent of the large businesses we deal with have people working for them who are resident in Scotland."
How the SRIT will work
Doug Stoneham, Senior Policy Adviser, Devolution with HMRC explained how the mechanics of the SRIT will work.
The UK basic, higher and additional income tax rates will be reduced by 10p for Scottish taxpayers and the Scottish Parliament will set a rate to replace that element of income tax, which may mean rates are higher, lower or the same as the UK rate.
Basic, higher and additional rates of SRIT must all be the same – in other words if the basic rate for Scottish taxpayers is 1p above (or below) the equivalent UK rate, so will the higher and additional rates.
Doug explained that there would be a number of consequential implications, especially for tax reliefs. For example, charities can claim back relief on Gift Aid donations at the basic rate. Identifying which donors are Scottish taxpayers, could lead to unacceptable administrative costs, so charities will be permitted to apply the UK basic rate, but higher and additional rate taxpayers will be able to claim relief at the SRIT.
Pension schemes claiming tax relief on their members' contributions at the UK basic rate will be able to continue to do so for Scottish taxpayers between April 2016 and April 2018, after which they will have to apply the Scottish rate where appropriate. Higher and additional rate taxpayers will be able to claim with reference to the Scottish rate.
The construction industry scheme would be unaffected, Doug said. For trusts and Real Estate Investment Trusts (REITs) if the SRIT diverges from the UK rate there may be a mismatch between the tax paid by trust and amount charged on beneficiary and this, Doug explained, would need to be corrected by a claim on behalf of the taxpayer.
Who is a Scottish taxpayer?
Tax Consultant, Professor Alex McDougall, CA explained the rules covering who is a "Scottish taxpayer". A "Scottish taxpayer" must be resident in the UK, for tax purposes, and meet one or more of the following:
A: Has a "close connection" with Scotland (broadly, their principal residence is in Scotland)
B: Has "no close connection" with any other part of the UK, and spends more days in Scotland during the tax year in question than in any other part of the UK.
C: Is an MP at Westminster for a Scottish constituency, a Member of the Scottish Parliament or a Member of the European Parliament for Scotland.
There are no "split years" for SRIT, Alex explained: "You are either a Scottish taxpayer in a given year, or you are not."
Taxpayers with two places of residence in the UK, one in Scotland and one elsewhere, are Scottish taxpayers if their main place of residence is in Scotland for at least as many days as in any one other part of the UK (England, Wales or Northern Ireland).
Alex stressed: "Record keeping will be very important for the more mobile taxpayers."
PAYE and Self-Assessment
Lee Salt, of the HMRC Personal Tax Change Policy Delivery Team, gave an overview of the SRIT-driven changes that will have an impact on PAYE and Self Assessment. He explained that HMRC would identify Scottish taxpayers by postcode initially, notifying all the individuals affected to explain their obligations.
PAYE tax codes for Scottish taxpayers will be prefixed with an 'S'. Employees paying tax under PAYE should be encouraged to notify HMRC of any change of address, Lee said.
The S codes are likely to be issued for the first time next February/March as part of the annual coding process. An online test service will be available from October 2015 to enable developers to test their payroll and tax software to ensure it is compatible with SRIT.
For self-assessment, SRIT will apply for the tax year 2016/17 and the SA form will include a declaration for the individual to state whether or not they are a Scottish taxpayer.
Communicating the changes
The government will be rolling out a communications campaign this autumn, focusing initially on employers and then getting the message to individual taxpayers. All those with a Scottish postcode on HMRC records will be deemed to be subject to SRIT and will receive notice of that in writing.
The HMRC team advised that anyone who needs clarification or feels a mistake has been made should contact whoever normally deals with his or her tax affairs. Taxpayers who have not received a letter but believe they are subject to SRIT should notify HMRC of their address only or contact their HMRC call centre.
Coming up next
The implementation of SRIT under the Scotland Act 2012 is likely to be only the first stage, as fresh legislation is currently going through the UK Parliament to enact the Smith Commission's proposals for further devolution for Scotland. This would enable the Scottish Parliament to set its own rates and bands for income tax, potentially with different rates for basic, higher and additional rate taxpayers.
Subject to a referendum yet to take place, under proposals from the Commission on Devolution in Wales (also known as the Silk Commission), we may also see a Welsh Rate of Income Tax set by the Welsh Assembly, along similar lines to the SRIT.
ICAS members and non-members are invited to submit views on the SRIT and its implementation by email.